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How to Smooth Out Irregular Income

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Some of you know that Bargaineering is my full time gig and one of the most common questions I get is how did I handled the irregular nature of the site’s income. It’s actually not an uncommon problem since a lot of professions have “bumpy” irregular income. Teachers get paid ten months out of the year (you can opt to have it smoothed out to twelve months, but isn’t it better to get your money asap?), salespeople and other commissioned folks get paid uneven amounts, and freelancers find themselves in and out of work on a regular basis. It’s a common problem and one I believe is easily solved, especially with the advent of online banks.

So if you’re wondering how to smooth out irregular income and “fake” a regular salaried job, in terms of regular paychecks, here’s a very simple way to do it.

How to Smooth Out Irregular Income

Account Setup: First, you’ll need to find a bank that will let you create at least two accounts and the ability to make automatic transfers between them. When I was researching this, I found ING Direct to be the most user-friendly for this but you can use any bank that permits regular transfers.

Next, create two accounts (name them whatever you like):

  • Incoming Account
  • Spending Account

Smoothing Step: You will deposit all income payments into the Incoming Account and you will do all of your spending from the Spending Account. Visually, it would look like this:
Smooth Out Income Chart

The idea is that all of your income will flow into your Incoming Account and you’ll “pay” yourself a regular salary, at whatever interval you want, into your Spending Account. This “smooths” out your income. If you can use a high yield savings account as your Incoming Account, you can even earn a little bit of interest as your money sits there, waiting to be smoothed out.

How Much to Pay Yourself

Next, you need to decide what your “salary” is going to be and how often. This is the tricky part if your income is especially unpredictable. If you have a have a predictable salary, like a teacher, you can simply take your annual salary and divide by the number of payments. You get paid for ten months into your Incoming Account and the Incoming Account pays you for twelve.

If you have especially unpredictable income, your best bet is to look at your income last year and make adjustments to how well you think this year will be. Since you can adjust the transfers as often as you’d like, all you need to make sure is that you don’t transfer more than you’ve been paid. If you aren’t paying yourself enough, it’s trivial to go into your account and manually transfer more funds out.

For example, let’s say you estimate you’ll make $52,000 a year from your freelancing business. You want to be paid weekly so you “pay” yourself $1,000 a year. It’s been an especially good year and you realize that, through half the year, you’ve already made $60,000 with 26 weeks left. Nothing stops you from “paying” yourself a little extra.

Setting Up The Transfers

ING Direct Automatic Savings Plan
As I mentioned earlier, ING Direct makes it really simple but any bank with automatic transfers will work. ING Direct calls it an “Automatic Savings Plan” and you can set up transfers from anywhere, including other banks. I had a checking account with Bank of America where all the deposits were made (later moved to a business account) and the automatic transfers were made on a monthly basis. ING Direct lets you transfer every week, bi-weekly, bi-monthly (15th and end of the month), as well as monthly.

Once you set things up, you’ll find that smoothing out irregular income is extremely easy with the banking tools available today.

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9 Responses to “How to Smooth Out Irregular Income”

  1. This is exactly how I’ve coached people to manage this. You have to treat your income like a business, whether it is or not. Pay yourself a salary that you’re reasonably sure won’t exhaust the incoming account and anything at the end of the year treat like a bonus.

    And for people with small businesses, this should be gospel. This also helps with setting aside the money needed to pay taxes and making business related transactions.

    • This is a very good idea. However, I would love to get some ideas on some good banks for businesses. I know it varies based on your location, but if you have any good on line business banks you can research for us it would be great. Also, how can small businesses, especially those who do a lot of business on line, reduce some of the on line fees incurred with credit card companies.

      Thanks DCA

  2. Aaron says:

    This is one of the best ways I’ve seen this illustrated.. thanks. It’s definitely a tough one to figure out.

  3. Sun says:

    This only works if you have enough of a cushion. Dave Ramsey recommends saving 3 to 6 months of expenses. If you are constantly struggling, you either have a spending problem, an income problem, or both. I think one way to approach this is to wind down your spending to get to a point where you have a comfortable cushion. Set a budget that reasonably predicts your expenses. Then you can set up automated transfers that meet your needs and to a lesser degree, wants.

  4. Evan says:

    I always thought a product would be great for this type of situation. Like an insurance or banking product that turns your income into a short 1 year or 2 year “annuity.”

  5. Interesting stuff. I get paid regularly now, but this may change in the future so i’ll have to take a look at this in more detail.

  6. Mike C. says:

    Don’t forget to keep enough asside for the quartly Fed. , State, and local 1040 ES payments.

  7. Nicole says:

    I’ve used ING for a few years now and it has worked out really well. Like you said, it’s very easy to make changes when needed.

  8. Seth says:

    “so you “pay” yourself $1,000 a year”

    Not a big deal, but I think you meant to put “week”. I’m sure people get the drift though.


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